Know the Source: The Polysilicon Supply Chain
In the previous blogs we looked at the Xinjiang Uyghur Autonomous Region, and the international concern about the implementation of forced labour on the Uyghur population. We noted that the U.S. Department of Homeland Security maintains an explicit statutory prohibition on the importation of goods produced using forced labor, and maintains an active list of products that are currently subject to Withhold Release Orders (WROs). That list includes disposable gloves coming from Malaysia, tomatoes and cotton from China, and stevia from China’s Inner Mongolia Autonomous Region. In July 2021, that list grew to include silica-based products from five companies in the Xinjiang Uyghur Autonomous Region. What are the implications for the polysilicon supply chain?
What is the process chain for Polysilicon?
The use of silica depends upon the grade of the ore. Lower-grade silica-containing material is primarily processed for use in construction. Progressively higher grade silica is used for more advanced processes for glassmaking, for metal casting and chemical production (such as silicones), or is reacted to produce silicon metal. Refined silicon can be converted to ferrosilicon (a silicon iron alloy) for use in iron and steelmaking, or it can be further purified.
The highest grade silica (containing the least impurities) is used for the production of polycrystalline and monocrystalline silicon for use in electronics. These crystalline silicons are the foundation material for microelectronic devices, semiconductor chips, and solar cells. These electronic components are incorporated into everything from solar panels to automobile sensor devices, from bank ATMs to cell phones.
Where are these materials produced?
Silica is mined in more than 60 countries. As of 2018, the world’s largest producers were the United States, the Netherlands, Spain, and Oman. Silica is usually processed close to the mine site.
Silica is reacted with coal, to yield silicon and carbon dioxide. The process requires significant amounts of electrical energy (10–12MWh to manufacture one ton of metallurgical-grade silicon).
Polysilicon is the key ingredient for the manufacture of photovoltaic cells and electronic chips, yet the vast majority of the production of polysilicon is limited to four countries (China, Germany, Malaysia, and the USA). Other countries (including Russia, Japan, and Qatar) account for the remaining 3%.
Seven of the top eleven polysilicon producers are located in China. Wacker Chemie AG of Germany, OCI in Malaysia, REC Silicon ASA and Hemlock Semiconductor Operations in the United States complete the list of the major producers.
But there is another side to this supply chain story other than simply production volume.
We have seen that Chinese companies are the biggest manufacturers of both silicon and polysilicon, and that polysilicon is a key ingredient for the manufacture of electronic circuit assemblies. How many of these companies have been implicated in the investigation of forced labor or human rights abuses in their processes or in the products that they receive to process?
Which companies have been implicated?
The United States Customs and Border Protection service implemented Withhold Release Orders (WRO) on polysilicon, and on products manufactured from polysilicon originating from five companies in China. These five companies supply materials in one or more of the first three steps of the polysilicon supply chain.
We also touched on a study published in 2021. “In Broad Daylight” details serious human rights concerns directly involving several companies participating in the polysilicon photovoltaic supply chain in China. Let’s look a little deeper at the suppliers that have been implicated by this report, and the part that they play in the polysilicon supply chain.This table lists the companies named in the study, and their step in the polysilicon production process.
These 20 companies have been directly implicated in forced labour programs in the Xinjiang Uyghur Autonomous Region. This means that every downstream customer of these 20 companies is complicit, willingly or unwittingly, with their actions. These downstream customers have, of course, an exceedingly important and specific need for active and accurate due diligence. The challenge for any company sourcing material or product containing polysilicon or metallurgical silicon is knowing if any of their suppliers or their suppliers’ suppliers have sourced from these companies.
Which implicated companies produce polysilicon?
Seven Chinese companies together manufacture more than 75% of the world’s polysilicon. Four of these: Daqo; GCL-Poly; TBEA/Xinte; and East Hope have been directly implicated in the use of forced labor, while a fifth, Asia Silicon, sources raw materials from implicated supplier Hoshine. This leaves two Chinese polysilicon producers, Tongwei and Inner Mongolia Dongli Photovoltaic, that have not been implicated in the use of forced labor in production. There have been suggestions that the policies implemented on the non-Han communities in Xinjiang could be replicated in China’s other Autonomous Regions Inner Mongolia and Tibet, however these allegations have not been documented. The status of the use of forced labor by Inner Mongolia Dongli Photovoltaic remains to be evaluated through customer-driven due diligence.
So what does this mean for the photovoltaic and electronic chip supply chains? If 75% of Chinese polysilicon production has been implicated as involved with forced labor, and Chinese polysilicon production accounts for 75% of world production, then over half of the world’s polysilicon is being manufactured by companies using forced labor. Yet polysilicon production is only one of the steps from silica to solar panel. Downstream participants in a supply chain need to ‘know the source’.
Transparency and Know Your Customer
The financial community has used the process of KYC, or know your client/customer since the 1950s. Accessing reliable information to verify the other party’s identity is a critical step for a wide range of international trade transactions and processes. Those processes include customer profiling, customer identification, and transaction monitoring.
KYC information is essential to the risk management of business contracts, the onboarding of new suppliers, and customs clearance of transactions. KYC processes help assure that customers are not participating in money laundering.
Transparency and Know Your Supplier
The concept of KYS, or ‘know your supplier’, has also evolved. In the manufacturing sector, KYS policies have typically been applied to transactional and process concerns. The financial group would evaluate factors like a supplier’s financial stability and ownership. The purchasing group would look at things like ensuring compliance with product quality requirements, supplier timeliness, supplier involvement in process change, and critical event management. Together these evaluations would help in the manufacturer’s mitigation of risk from an immediate supplier, but what about the suppliers further upstream.
KYS inquiries are seldom more than one tier deep. Suppliers themselves have suppliers:
- Who are they and can they be trusted?
- Does a supplier contract out production and is that contractor a responsible supplier?
- Can I trace a product problem back to its true source?
- Can I be reasonably certain that none of my suppliers up the chain use forced labor, or have been involved in money laundering, corruption, or fraud?
Answering these questions requires a somewhat different approach to due diligence, for instead of focusing on the needs of ensuring a reliable manufacturing process, it calls for active risk management and prevention of a wider spectrum of concerns up the full supply chain. The purchasing, finance, and legal departments, which have previously been charged to assure compliance with immediate supplier agreements, now need to be leading a more widely-encompassing, thorough, and comprehensive process.
On July 22, 2021, the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) was published in the German Federal Law Gazette. The objective of this Act is to more effectively “safeguard human rights and the environment in the global economy”. It will apply to companies with 3,000 or more employees in Germany and will take effect in 2023 and will expand to companies with 1,000 or more employees in 2024.
Under the Act, companies must make reasonable efforts to ensure that human rights abuses do not occur in their own business operations, and in their supply chains. Companies must conduct a risk analysis and take preventative and corrective actions with respect to their indirect suppliers. In situations where there is “substantiated knowledge”, due diligence obligations may be increased. The Act particularly notes a requirement to assess child and forced labour, slavery, disregard of labor protection obligations, freedom of association, land deprivation and torture, cruel, inhuman, or degrading treatment as human rights risks. Know your source is entering new ground.
Last month’s signing into law of the Uyghur Forced Labor Prevention Act, introduced the concept of “rebuttable presumption” to US imports. Materials and goods that originate from Xinjiang Uyghur Autonomous Region, or that are suspected of having been manufactured using materials that originated from Xinjiang, are presumed to have been made using forced labor and will not be permitted entry to the US. The presumption is rebuttable.
What does this mean for customers who are down the supply chain from companies using Uyghur forced labor?
In the example of the solar module industry, it is not inconceivable that any solar panel could be presumed to have been manufactured with components containing material produced by a company that uses forced labor. Exporters to the US and customers and importers in the US will need to rebut this presumption. They may need to prove the absence of forced labor along the entire production chain.
So what should the participants in a supply chain do?
Review your Code of Conduct
The first corrective step to address human rights abuse in a supply chain starts with one’s own business. Assure that you state in the company’s Code of Conduct that you do not condone, or do business with organizations abusing human rights such as using forced labor. Train your employees about the Code of Conduct and their rights to file grievances. Then ensure that procurement contracts reference the obligation to satisfy your due diligence process.
Once you have secured a reliable internal performance standard, require your suppliers to have in place or implement similar Code of Conduct provisions. Include these provisions in their contracts and require them of their suppliers.
Trace your supply chain
Due diligence demands traceability. Traceability starts with the willingness to know your supplier and know your customer. Now the tools and services are available to help make this process a lot easier.
- Traceability-as-a-service can map your full supply chain and secure the data on the blockchain, where you can choose what information to make public, and which to keep private.
- Product Passports conveyed with shipments can incorporate your selection of documentation, such as source, quality, ownership, certifications, and even important performance metrics like carbon emissions.
With distributed ledger technology like Minespider’s, you define the permission to view your data, so your suppliers, your customers, your customs’ agents, and your investors can access the supply chain information that you specifically identify as relevant to each group.
The time is right for supply chains to use distributed ledger technology to know their suppliers, to assure product and process provenance, and to disclose and help correct human rights abuse.